Answering Your Questions on SPACs
Andy Snyder|May 24, 2021
Oh boy… we did it again.
Our thoughts on SPACs are stirring the minds and dreams of investors once again.
“Finally,” they’re saying, “a way into what we’ve been pushed out of for far too long.”
Our mailbag has loaded up over the past few days.
Your fellow readers have lots of questions… and plenty of good ideas.
If you’re excited about one of the biggest new opportunities on Wall Street, keep reading.
If you’re not, well, you should be. This is huge.
Here are some of the most common questions we’ve received…
How Long Have SPACs Been Around?
We love this question. It shows the value of perseverance… and proves that sometimes it takes a while for a good idea to catch on.
Two friends who call themselves “Nuss” and “Miller” – their real names are David Nussbaum and David Miller – launched the SPAC model in 1993. One was an investment banker, the other was a lawyer.
Their intent was to open IPOs to everyday investors.
A great idea… as so many folks are now finding out.
Unfortunately, the idea took a while to catch on. After all, the “little guy” doesn’t have a lot of sway on the Street. As long as the big boys could still get into pre-IPO opportunities, they didn’t have much motivation to change.
But then rules tightened…
Why Are SPACs So Popular Right Now?
It’s not one of the market’s great mysteries. SPACs (or, to the formal folks, special purpose acquisition companies) are red-hot right now for a few reasons.
The first comes thanks to Uncle Sam.
Because regulators get paid to grow and can’t leave well enough alone, the scrutiny it takes to bring a private company public through traditional means has gotten flat-out nuts in recent years. It can now take as many as 24 months and as much as a full year’s worth of revenue… just to qualify for a listing.
With SPACs, the process is far simpler. It can take as little as a few months (if not weeks!) and costs pennies on the dollar.
The second reason comes thanks to COVID-19.
Yes, SPACs were heating up in 2019, but the pandemic pushed a lot of pre-IPO firms over the edge. Unable to travel and gather for their money-pooling roadshows, many companies turned to the ease of SPACs.
Since the capital is already raised with a SPAC, they don’t have to travel the country, pitching their wares to hopeful investors.
And finally, like a lot of things on Wall Street, SPACs are booming because, well, SPACs are booming. It’s a bit of following the leader. Once a trend gets started, it’s hard to stop.
Is It Too Late to Get In On the SPAC Action?
This is a huge question. The headline writers have taken advantage of their creative license to exploit the hype around SPACs. The truth is, we’re just at the beginning of this trend. Our take is that because of the efficiency and low cost of SPACs, they’ll soon replace traditional IPOs.
They’re already halfway there.
Last year, just as much money went into SPACs as into traditional IPOs.
But here’s the thing few folks are talking about…
SPACs have created a competitive race. Their prevalence here in the States is drawing money from around the planet. So far this year, 11 European companies have announced their plans to debut on the NYSE through a SPAC.
It’s taking money out of foreign markets.
Leaders in Europe don’t like the idea. They’re fighting back by lowering costs and boosting other incentives. The U.K. is already getting started.
It’s a win-win for the small investor. It will draw more companies away from the expensive and time-consuming traditional IPO market and create incentives to make SPAC deals even more lucrative.
And, Finally, Insight From a Reader
The following note comes from subscriber Ben R. It’s well worth sharing…
Andy, I’m excited about Venture Fortunes‘ new focus on SPACs and (especially) warrants.
I’ve had previous success with warrants: My best gains so far have been with warrants on BLNK (bought for $1.27, sold for $30) and on PRPL (bought for $0.28, sold for $9.36). (I’m not saying that to brag, but to offer it as testimony to the power of warrants.)
But there’s one nice feature of warrants – one that differentiates them significantly from options – that I haven’t heard anyone talk about. That feature is their flexibility.
Say you want to buy call options priced at $6, but your position size limit is $1,000. If the options are priced at $6, then the minimum position you can take (a single contract) will run you $600. If you buy two contracts, it’ll cost you $1,200 – more than your position size limit. So you’re stuck using only 60% of the funds you had available for that position. But if you want to buy warrants priced at $6, and you’re working with the same position size limit, then you can buy up to 166 warrants, for a total expenditure of $996 (or 99.6% of the funds available for that position). So in spite of the similarities between warrants and options (including the ability to target explosive gains with very little capital at risk), warrants make it easier for you to work within your position size limits.
I suspect your subscribers who are accustomed to buying options would appreciate having this difference between options and warrants pointed out.
Thanks, Ben. There are some other great benefits to SPAC warrants as well… like how they don’t expire worthless in a few months… can easily be bought and sold through a standard listing… and don’t require an upgraded brokerage account.
For all the details on warrants and our recent in-depth interview on SPACs straight from Wall Street, check out this link. But don’t hesitate. The deal we detail has some very big news coming for it on June 10.
